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Subcontractor Default Procedures

Document Type: Procedure
Version: 1.0
Last Updated: February 2026
Distribute To: Project Managers, Executives

Purpose​

Establish procedures for handling subcontractor default situations to minimize project impact.

⚠️ IMPORTANT​

Subcontractor default is a serious situation. Consult with legal counsel before taking termination action.

Warning Signs of Default​

Financial Warning Signs:​

  • Slow payment to suppliers/employees
  • Lien notices received
  • Requests for early payment
  • Unusual payment requests
  • Rumors of financial trouble

Performance Warning Signs:​

  • Insufficient manpower
  • Missed schedules repeatedly
  • Quality deteriorating
  • Poor supervision
  • Subcontractor unavailable
  • Material not arriving

Behavioral Warning Signs:​

  • Avoiding communication
  • Aggressive payment demands
  • Blaming others
  • Excuses
  • Key people leaving

Default Categories​

Performance Default:​

  • Failure to prosecute work
  • Failure to meet schedule
  • Failure to maintain quality
  • Failure to provide resources

Financial Default:​

  • Failure to pay suppliers/labor
  • Failure to provide waivers
  • Bankruptcy/insolvency

Contract Default:​

  • Failure to maintain insurance
  • Failure to comply with terms
  • Material breach

Response Steps​

Step 1: Document Issues​

Create Record Of:

  • Specific failures
  • Dates and times
  • Impact on project
  • Communications
  • Cure attempts

Step 2: Issue Notice of Default​

Written Notice Must Include:

  • Specific default(s)
  • Contract provisions violated
  • Cure period (per contract)
  • Consequences if not cured

Sample Language:

RE: Notice of Default
    Project: [Name]
    Subcontract: [Number/Date]

Dear [Subcontractor]:

This letter serves as formal notice of default pursuant to 
Section [X] of the Subcontract dated [date].

Specifically, you have failed to:
[List specific failures]

These failures constitute default under Section [X] of the 
Subcontract.

You are directed to cure these defaults within [X] days of 
this notice. Failure to cure will result in termination of 
the Subcontract for cause, and [Company] will exercise all 
rights and remedies available under the Subcontract and law.

[Signature]

Step 3: Monitor Cure Period​

  • Document any cure attempts
  • Note if cure is adequate
  • Continue communication
  • Prepare for potential termination

Step 4: If No Cure - Termination​

Before Terminating:

  • Consult legal counsel
  • Verify contract compliance
  • Notify surety (if bonded)
  • Prepare for transition

Termination Process​

If Termination Warranted:​

  1. Final Notice

    • Default not cured
    • Termination effective date
    • Cease work directive
    • Site access revocation

  2. Secure the Work

    • Inventory materials
    • Secure equipment
    • Document conditions
    • Protect work in place

  3. Notify Surety (If Bonded)

    • Formal notice of default
    • Request surety action
    • Provide documentation
    • Coordinate replacement

  4. Engage Replacement

    • Solicit bids/quotes
    • Expedite selection
    • Execute agreement
    • Document additional costs

  5. Pursue Remedies

    • Calculate damages
    • Surety claim (if bonded)
    • Withhold from final payment
    • Legal action if necessary

Surety Notification​

If Subcontractor is Bonded:​

Performance Bond:

  • Notify surety of default
  • Request surety to:
    • Complete the work, OR
    • Pay for replacement contractor, OR
    • Pay damages up to bond amount

Payment Bond:

  • For claims from sub's suppliers/subs
  • May need to direct payments

Surety Options:​

  1. Tender defaulting sub
  2. Arrange for completion
  3. Pay contractor to complete
  4. Deny claim (contest)

Calculating Damages​

Completion Damages:​

Cost to Complete (Replacement):      $__________
Less: Remaining Subcontract Balance: $__________
                                     ───────────
Completion Overage:                  $__________

Plus: Additional Costs:
  - Delay damages:                   $__________
  - Supervision:                     $__________
  - Administration:                  $__________
  - Legal fees:                      $__________
  - Other:                           $__________
                                     ───────────
TOTAL DAMAGES:                       $__________

Less: Amounts Held (retention, etc): $__________
                                     ───────────
NET CLAIM:                           $__________

Preventing Default​

Prequalification:​

  • Financial review
  • References checked
  • Bonding capacity
  • Experience verified

During Project:​

  • Monitor performance
  • Address issues early
  • Communicate regularly
  • Pay timely (if earned)
  • Collect waivers

Early Warning Response:​

  • Address concerns immediately
  • Document conversations
  • Provide support if appropriate
  • Have backup plan

Default Documentation Checklist​

================================================================
        SUBCONTRACTOR DEFAULT CHECKLIST
================================================================

Subcontractor: ____________________________________________

Project: __________________________________________________

================================================================

DOCUMENTATION:
☐ Subcontract agreement
☐ Performance history
☐ Communication records
☐ Schedule analysis
☐ Quality documentation
☐ Payment records
☐ Waiver history
☐ Insurance certificates
☐ Bond (if applicable)

NOTICES:
☐ Initial warning(s)
☐ Formal notice of default
☐ Opportunity to cure provided
☐ Termination notice (if applicable)
☐ Surety notification (if bonded)

DAMAGES:
☐ Cost to complete calculated
☐ Delay damages calculated
☐ Additional costs documented
☐ Credits/amounts held identified

REPLACEMENT:
☐ Replacement bids obtained
☐ Replacement contract executed
☐ Additional costs documented
☐ Schedule impact documented

================================================================
  • Subcontract Agreement
  • Prequalification Procedure
  • Backcharge Procedure
  • Termination Procedures

Template provided by support.construction. Always involve legal counsel in default situations.